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Frequently Asked Questions

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 01 What Is an Investment Bank - IB?

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An investment bank (IB) is a financial intermediary that performs a variety of services. Most Investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations and acting as a broker or financial adviser for institutional clients.

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Major investment banks include JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Credit Suisse and Deutsche Bank. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers.

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 02  How an Investment Bank Works 

 

The advisory division of an investment bank (IB) is paid a fee for their services, while the trading division experiences profit or loss based on its market performance. Professionals who work for investment banks may have careers as financial advisors, traders or salespeople. An investment banking career can be very lucrative, but it typically comes with long hours and significant stress.

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Investment banks are most known for their work as financial intermediaries. That is, they help corporations issue new shares of stock in an initial public offering (IPO) or follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank's role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.

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Investment banks’ clients include corporations, pension funds, other financial institutions, governments, and hedge funds. Size is an asset for investment banks. The more connections the bank has within the market, the more likely it is to profit by matching buyers and sellers, especially for unique transactions. The largest investment banks have clients around the globe.

 

 03  How many types of Investment Bank Activities

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Financial Advisors

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As a financial advisor to large institutional investors, the job of an investment bank is to act as a trusted partner that delivers strategic advice on a variety of financial matters. They accomplish this mission by combining a thorough understanding of their clients' objectives, industry and global markets with strategic vision trained to spot and evaluate short- and long-term opportunities and challenges facing their client.

 

Mergers and Acquisitions

 

Handling mergers and acquisitions is a key element of an investment bank's work. The main contribution of an investment bank in a merger or acquisition is evaluating the worth of a possible acquisition and helping parties arrive at a fair price. An investment bank also assists in structuring and facilitating the acquisition in order to make the deal go as smoothly as possible.

 

Research

 

The research divisions of investment banks review companies and author reports about their prospects, often with "buy", "hold" or "sell" ratings. While research may not generate revenue itself, the resulting knowledge is used to assist traders and sales. Investment bankers, meanwhile, receive publicity for their clients. Research also provides investment advice to outside clients in the hopes that these clients will take their advice and complete a trade through the trading desk of the bank, which would generate revenue for the bank. Research maintains an investment bank's institutional knowledge on credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients.

 

 

 04  SEC Filings: Forms You Need To Know

 

Registration Statements:

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Registration statements provide investors with an understanding of the offered securities and the profitability of the company. All companies, foreign and domestic, must file these statements or qualify for an exemption. The statements consist of two parts:

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  1. Prospectus - A legal document that charges the issuer of the securities to provide details of the investment offered, how the business operates, its history, management, financial condition, and insight into any risk. The financial forms included in the prospectus, such as an income statement, must be audited by an independent certified public accountant.

  2. Additional information - In addition to the prospectus, the company may provide any relevant additional information, such as recent sales of unregistered securities.

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10-K Report

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The 10-K provides investors with a comprehensive analysis of the company. It's similar to a prospectus and contains more information than an annual report. For instance, financial statements are more detailed. Companies must submit this lengthy annual filing within 90 days of the end of their fiscal year.

The 10-K is comprised of several parts:

 

10-Q Report

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A truncated version of the 10-K is the 10-Q. The 10-Q is provided within 45 days of the end of each of the first three quarters of the company's fiscal year. It details the company's latest developments and provides a preview of the direction it plans to take. Major differences from the 10-K include unaudited financial statements and less detailed reports.

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8-K Report

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Major developments that investors should know about are described in the 10-K or 10-Q, but if those developments don't make the two filings in time, they are presented in the 8-K. This unscheduled document addresses specific events and provides further detail and exhibits, such as data tables and press releases.

Events that lead to the filing of the 8-K include bankruptcies or receiverships, material impairments, completion of acquisition or disposition of assets, departures or appointments of executives. and other events of importance to the investor.

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Proxy Statement

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In the proxy statement, investors can view management's salaries, any conflicts of interest that might exist, and other perks received. It's presented prior to the shareholder meeting and must be filed with the SEC before soliciting a shareholder vote on the election of directors and approval of other corporate actions.

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Forms 3, 4 and 5

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In Forms 3, 4 and 5, investors watch how ownership and purchases are shifted by the company's officers and directors.

  • Form 3, the initial filing, tells the ownership amounts.

  • Form 4 identifies the changes in ownership.

  • Form 5 is an annual summary of Form 4 and includes any information that should have been reported.

 

Schedule 13D

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The Schedule 13D form not only reveals who owns most of the company's shares but also introduces the owner(s) to investors and provides contact information. It's filed within 10 days of any entity acquiring 5% or more of any class of a company's securities. It provides the following information:

  • Background information on the owner (e.g., criminal misbehavior) and the type of relationship this owner has with the company

  • An explanation of why the transaction is taking place

  • The type and class of the security

  • The origin of funds used for purchases

 

Form 144

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With Form 144, investors get clues to a corporate insider's pattern of selling securities and pressure to sell. It's a notice of the intent to sell restricted stock, typically acquired by corporate insiders or affiliates in a transaction not involving a public offering. The stock is restricted because it must meet certain conditions before becoming transferable. The transaction, or at least part of it, is made within 90 days of filing. Form 144 is required when the amount sold during any three-month period exceeds certain sales thresholds.

 

Foreign Investments

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US investors' participation in cross-border securities has eased as a result of a 2008 rule change. The SEC recognized global and technological changes by eliminating the need for foreign companies without SEC-registered securities to submit paper disclosures and instead allowing investors to access them in English on the Internet. Investors will also receive more timely annual reports because the companies will have to submit them to the SEC two months prior.

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Reading the SEC Forms

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Understanding the information submitted by companies involves taking some extra steps to read between the lines. Review SEC documents together as opposed to separately to get a better view of the overall picture, especially with the financial forms. Financial ratios are often used in the statements to identify the company's short- and long-term financial strength.

Red flags are often revealed in a company's footnotes. Red flags include:

  • Paying attention when the company discredits short sellers

  • Very confusing sections in a 10-K or 10-Q

  • Sudden one-time or special charges

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